Gold Tops $1,500 on Outlook for Escalating U.S. Debt, Dollar

Gold futures hit their highest level today at $1,500.50 an ounce rising on US debt concerns and inflation. US credit rating is expected to be lowered within the net few years leaving investors to look at gold as an alternative currency.

By Pham-Duy Nguyen - Apr 19, 2011 11:34 AM MT
Bloomberg

Gold futures rose to a record $1,500.50 an ounce as U.S. debt concerns weighed on the dollar, boosting demand for the precious metal as an alternative investment.

The greenback dropped against the euro on speculation that the European Central Bank will continue to raise borrowing costs as some nations struggle to contain sovereign debt. Standard & Poor’s yesterday revised its long-term outlook on U.S. debt to negative from stable. Gold has climbed 32 percent in the past year, and silver prices have more than doubled.

“The U.S. credit rating will undoubtedly be lowered in the next few years,” said Michael Pento, a senior economist at Euro Pacific Capital in New York. “This will mean much higher borrowing costs and a much lower currency. International investors have been using gold and silver as an alternative currency and an alternative to the dollar, and this will only exacerbate and accelerate that process.”

Gold futures for June delivery rose $2.20, or 0.1 percent, to settle at $1,495.10 at 1:38 p.m. on the Comex in New York. Earlier, the price climbed as much as 0.5 percent to the record.

Gold for immediately delivery was little changed at $1,495.35 at 2:33 p.m. New York time. Earlier, the price rose as much as 0.3 percent to an all-time high of $1,499.32.

Pento, who correctly predicted gold’s rally in the past three years, said the metal will reach $1,600 in 2011. The commodity has gained every year since 2001 on increased investment demand for raw materials.

‘Buy Hard Assets’

“The bullish trend becomes pronounced as more and more people get out of the dollar to buy hard assets,” said Lim Chae Myung, a Seoul-based trader with Hyundai Futures Co.

The Treasury Department projected that the government may reach the $14.3 trillion debt-ceiling limit as soon as mid-May and run out of options for avoiding default by early July.

The Federal Reserve has kept its benchmark interest rate at zero percent to 0.25 percent since December 2008 and has pledged to buy $600 billion in Treasuries through June to stimulate growth.

The ECB this month raised its main rate to 1.25 percent from a record 1 percent to stem inflation.

The Fed probably won’t risk damping economic growth by raising borrowing costs rapidly, Pento said.

S&P changed its long-term rating, citing “material risk” that policy makers won’t reach an accord on “medium- and long- term budgetary challenges.”

“There certainly has always been that lingering concern over U.S. debt and the S&P people are finally identifying the threat,” said Stephen Platt, an analyst at Archer Financial in Chicago. “The world is awash in liquidity. Gold’s slow, grinding action upward shows the deterioration in the dollar, excess liquidity and deficit problems are still in force.”

Silver futures for May delivery rose 95.7 cents, or 2.2 percent, to close at $43.913 an ounce. After the settlement, the price reached $43.95, the highest since 1980.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net.

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